(The following statement was released by the rating agency) Fitch Ratings-London-November 01: Fitch Ratings has affirmed Aviva (LON:AV) Plc's (Aviva) core insurance subsidiaries' Insurer Financial Strength (IFS) Ratings at 'AA-' (Very Strong) and Aviva's Long-Term Issuer Default Rating (IDR) at 'A+'. The Outlooks are Stable. Key Rating Drivers The ratings reflect Aviva's very strong business profile and capitalisation and strong earnings. Aviva's very strong business profile reflects the group's most favourable competitive positioning, scale and diversification, and favourable business risk profile relative to UK life insurance companies. This assessment is reflected in Aviva's solid market positions in life, savings and non-life lines, and the group's household brand in the UK. These rating strengths are complemented by the group's substantial operations in Europe and Canada, which diversify earnings. In 1H19 45% of insurance operating profit originated outside the UK. Aviva's capitalisation, as measured by Fitch's Prism Factor-Based Capital Model (Prism FBM), is 'Very Strong' based on end-2018 results (2017: 'Extremely Strong'). The deterioration from 2017 was due to adverse market movements in 2018, which reduced Aviva's unallocated divisible surplus (UDS), on an IFRS basis, by over GBP3 billion. However, at end-1H19 a market recovery had largely restored Aviva's UDS. Aviva's Solvency II (S2) capital requirement (SCR) coverage was 180% at end-2018 on a regulatory basis (2017: 169%). On a Fitch-calculated basis, which fully credits the surplus in with-profit funds, Aviva's S2 ratio was 194% at end-2018 (2017: 182%), in line with peers'. The group's financial leverage ratio (FLR) improved to 25% in 1H19 (2018: 28%), largely due to the recovery of Aviva's UDS, which Fitch treats as capital in its FLR calculation. Fitch expects Aviva's FLR to improve further in the medium term due to its planned redemption of around GBP1.5 billion of debt by 2021-2022, including GBP210 million step-up tier 1 insurance capital securities in November 2019. We expect these actions to improve Aviva's FLR to the 20%-25% range, in line with many similarly rated European peers'. Fitch views Aviva's financial performance as strong. Net income was GBP1.2 billion for 1H19 (1H18: GBP0.4 billion, 2018: GBP1.7 billion), driven by GBP0.5 billion positive investment variances. These offset non-cash items, such as the amortisation of acquired value of in-force (GBP167 million in 1H19). Annualised net income return on equity (ROE), excluding minority interests, improved to 13% in 1H19 (2018: 9%, 2017: 8%). Group operating profit was stable at GBP1.4 billion in 1H19 as weakening performance in the life businesses was offset by a recovery in the Canadian business driving a strong 29% growth in non-life operating profit. We expect operating profit to improve in the medium term as Aviva continues its GBP300 million cost-cutting initiative, which they expect to complete in 2022. Fitch assesses Aviva's debt service capabilities and financial flexibility as 'Strong'. Aviva's intention to reduce debt will strengthen the group's fixed-charge coverage (FCC) ratio, which is weak for the rating level. Aviva's FCC improved to 7.4x in 2018 (2017: 6.4x), and we expect further debt redemptions to result in an improvement of FCC to around 9x in the medium term. Our assessment of Aviva's financial flexibility is supported by the group's track record of accessing debt markets for long- and short-term debt. We assess the group's liquidity as 'Very Strong'. At end-July 2019 the group had a liquidity position of GBP2.3 billion, up from GBP1.6 billion at end-February 2019. This supports the group's GBP1.5 billion deleveraging plans and underpins strong interest cover on the remaining debt. We expect Aviva's liquidity position to remain strong, despite debt redemptions, supported by steady cash remittances (GBP1.6 billion in 1H19 and GBP3.1 billion in 2018). RATING SENSITIVITIES The ratings could be downgraded if Aviva's net income ROE falls below 6% for a sustained period. Other key rating triggers that could result in a downgrade include capitalisation, as measured by Fitch's Prism FBM, falling to the low end of the 'Very Strong' category, or financial leverage increasing above 30%. A sustained improvement of both financial leverage to less than 20% and net income ROE above 12% could result in an upgrade, although Fitch views this unlikely in the short term. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. Aviva Vie; Insurer Financial Strength; Affirmed; AA-; RO:Sta Aviva International Insurance Limited; Insurer Financial Strength; Affirmed; AA-; RO:Sta Friends Life Holdings plc; Long Term Issuer Default Rating; Affirmed; A+; RO:Sta ----subordinated; Long Term Rating; Affirmed; A ----subordinated; Long Term Rating; Affirmed; A- Aviva Plc; Long Term Issuer Default Rating; Affirmed; A+; RO:Sta ----subordinated; Long Term Rating; Affirmed; BBB+ ----senior unsecured; Long Term Rating; Affirmed; A Aviva Insurance Company of Canada; Insurer Financial Strength; Affirmed; AA-; RO:Sta Aviva Life Insurer Financial Strength; Affirmed; AA-; RO:Sta Aviva Insurance Limited; Long Term Issuer Default Rating; Affirmed; A+; RO:Sta ; Insurer Financial Strength; Affirmed; AA-; RO:Sta Aviva Assurances; Insurer Financial Strength; Affirmed; AA-; RO:Sta Contacts: Primary Rating Analyst Willem Loots, FIA Senior Director +44 20 3530 1808 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN Secondary Rating Analyst Harish Gohil, FIA Managing Director +44 20 3530 1257 Committee Chairperson Stephan Kalb, Senior Director +49 69 768076 118
Media Relations: Athos Larkou, London, Tel: +44 20 3530 1549, Email: athos.larkou@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Criteria (pub. 11 Jan 2019) https://www.fitchratings.com/site/re/10058790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10100132 Solicitation Status https://www.fitchratings.com/site/pr/10100132#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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